Taxation:  

It is necessary that government understand price elasticity of demand when pricing the goods and services that it provides for the community (such as public transport fares). Further, it also needs to be able to predict the effects of changes in the level of any indirect taxes, such as sales taxes, excise duties and special levies that is imposes on goods such as alcohol, tobacco products and petrol. These taxes and charges raise the price of the goods affected, and the government needs to be able to gauge the responsiveness of demand in order to estimate accurately the amount of revenue they will raise. This relationship explains why governments tend to charge indirect taxes, such as excise duties, on those goods that have a relatively inelastic demand, including alcohol, petrol and tobacco products. On the other hand, if the government were to impose an excise duty on a good for which demand is relatively price elastic, the increase in price caused by the tax would lead to a more than proportionate drop in sales. As a result, the increase in the tax may not raise revenue significantly. In market economies, consumers can exercise their right to buy whatever they want. However, consumers will only purchase certain goods in certain quantities at certain prices; if there is a price change, quantity demanded will adjust correspondingly. This is where price elasticity of demand comes in, measuring the responsiveness or sensitivity of the quantity demanded to changes in price using methods such as the total outlay method. Finally, this information is important to businesses, which need to find their optimal pricing policy in order to achieve their goal of maximizing profits, as well as to governments, which need to price their own goods and services and determine indirect taxes imposed on goods and services.